Fw: Thematic Report (Switch from ITNL to IRB)

 

 

Thematic Report [June 22, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Switch from ITNL to IRB Key points Trading premium gap at all-time high; buying opportunity in IRB: The recent sharp correction in IRB Infrastructure Developers (IRB) has created a huge divergence in the valuations of IRB and IL&FS Transportation Ltd (ITNL). ITNL trades at a 40% premium to IRB as against a mean average of an 11% premium and the usual band of a 5% to 20% premium. Notwithstanding the legal tangles of the IRB promoter, we believe that the divergence of more than 2x standard deviation (2SD) offers a compelling buying opportunity. IRB-sharp correction and clearance from a legal case to limit the downside: Though the charges levied against the promoter of IRB are serious, the correction of over 30% in the stock factors in a lot of the negatives and has made the stock available at a 40% discount to its mean average valuation multiple. The improving outlook for the road infrastructure developers should limit the downside risk in the stock though. Moreover, any positive development on the legal issue could result in a sharp re-rating of the stock. IRB's profitability less vulnerable to interest rates: Considering the economic turbulence that our country is going through (with inflation still at levels beyond the comfort zone of the central bank), we think the interest rate reversal cycle might be delayed by one or two quarters. For the companies with a high debt burden this would mean continued pain in terms of high interest charges for at least the next couple of quarters. Here, we think IRB is better placed in comparison with ITNL since the debt/equity ratio of IRB stands at 2.5 vs 3.7 for ITNL. On a closer analysis of the interest payments we find that while IRB pays almost 40% of its operating profit as interest charge, ITNL pays 50% of the same as interest charge (due to the interest payment on the annuity projects under construction). Further, in the last two years, IRB has been efficient in generating higher returns on invested capital (RoIC) as compared with ITNL with the FY2012 RoIC at 11.5% as compared with ITNL's 9.3%. Switch from ITNL to IRB: Fundamentally, we like both the companies and believe both would be likely beneficiaries of the tall target set by the National Highways Authority of India for project awarding this fiscal. In fact, ITNL shall score better than IRB on many financial parameters over the long term. However, the recent event-driven sharp correction in IRB has thrown open a tactical opportunity to shift from ITNL to IRB for superior returns in the near term.  Click here to read report: Thematic Report Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Cement (CCI penalty an overhang), Fertilisers (Normal monsoon to drive growth)

 

 

Investor's Eye [June 20, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR UPDATE Cement      CCI penalty an overhang Key points  CCI to impose penalty on cement companies: As per media reports, the Competition Commission of India (CCI) is set to pass an order in a day, accusing top cement companies of creating a cartel. According to the CCI officials, a few short-listed cement companies are likely to face a penalty of 8% of their average revenue in the past three years. The order has been signed by all members of the commission but is yet to be signed by its chairman.  Aditya Birla group to face the highest penalty: In total there were 39 cement companies that are under the CCI scanner; however, only the top 11 by revenue are likely to face penal action of 8% of their average sales in the past three years. If the order is approved by the CCI chairman, then it will affect companies like UltraTech Cement (UltraTech), Ambuja Cements, ACC, JP Associates, India Cements, Madras Cements and Shree Cement. As per the average revenue of the respective companies the highest penalty of about Rs1,025 crore is expected to be imposed on UltraTech. ACC and Ambuja Cements are likely to face a penalty of Rs600 crore to Rs650 crore whereas the other players like JP Associates, India Cements, Madras Cements and Shree Cement may have to face a penalty in the range of Rs300-400 crore. However, the managements of the Aditya Birla group, ACC and India Cements have mentioned that they have not received any correspondence from the CCI. Penalty works out to 20-35% of the cash and liquid investments: The cement companies will have to pay the penalty amount either from their cash and liquid investments or by raising debt. Considering the cash and liquid investments of the cement companies, we feel that none of the companies will have to resort to debt to pay the penalty. However, the impact of the penalty on their cash balance will be in the range of 20-35% except for Madras Cements, which shall suffer an impact of as high as close to 70%.  Impact on India Cements and Madras Cements severe in terms of market cap: The penalty as a percentage of the market capitalisation (market cap) for most of the cement companies on the penalty list is in the range of 2.5-3.0% except for India Cements and Madras Cements, which shall face the highest penalty. The penalty on India Cements works out to close to 12% of its current market cap and that for Madras Cements works out to 6% of its current market cap.  Impact of penalty on FY2013 estimated profit in range of 35-95%: Though the impact of the penalty on the market cap of the cement companies does not seem severe, but the impact of the same on our earnings estimate for FY2013 appears to be much severe and in the range of 35-95%. The companies with the highest impact on the FY2013E earnings include India Cements (an impact of 97%) and Shree Cement (an impact of 81%). Outlook We believe the cement companies shall challenge the CCI order (likely to be announced in a day) in the court. However, any penalty imposed by the CCI will be a negative for the cement companies particularly for India Cements, Madras Cements and Shree Cement (as per the earnings impact).  We maintain our neutral stand on the sector as we believe the positives in terms of a partial recovery in the demand environment and a better realisation are likely to support the revenue growth of the companies but cost pressure, a likely correction in the realisation and the penalty burden could be the key concerns for the earnings of the cement companies. However, we are selectively positive on Grasim Industries in the large-cap space and Orient Paper & Industries in the mid-cap space.      Fertilisers      Normal monsoon to drive growth Key points  Government defers urea price hike: The government has deferred the fertiliser ministry's proposal to hike the retail price of urea by 10% to Rs5,841 per tonne for FY2013. Urea is the only fertiliser that remains under the government's full control. Its current retail price is Rs5,310 per tonne. The proposal to hike urea prices was made to redress the imbalanced use of soil nutrient and to reduce the subsidy burden of the government. In 2011-12, indegenious urea and imported urea contributed Rs20,300 crore and Rs17,475 crore respectively to the fertiliser subsidy bill. The government's decision not to increase the price of urea will not affect the financials of the urea manufacturers because any increase in the variable cost shall be fully compensated by the government as urea is still under government control.   30 to 60% increase in prices of complex fertilisers: Non-urea fertiliser companies have resorted to massive rate hikes in all other nutrient products for the current kharif planting season. Non-urea fertiliser companies will increase the price of complex fertilisers due to a cut in the subsidy pay-out by the government and the depreciation in the rupee which has increased the cost of the imported raw materials such as phosphoric acid, diammonium phosphate (DAP) and Muriate of Potash (MOP). The new prices are technically effective from June 1, 2012. However, farmers would not have to pay these rates for the stocks that have been already dispatched to dealers. The stock of non-urea fertilisers is expected to last till the end of July 2012. The total quantity in stock is estimated at about 5.5 million tonne (mt) including 2.5mt of DAP, 1mt of MOP, 2mt of single super phosphate (SSP) and various other complex fertilisers. A steep increase in the price of non-urea fertilisers and the unchanged price of urea have increased the difference between the prices of urea and non-urea fertilisers which may affect the demand for the non-urea fertilisers adversely, thereby spurring the demand for urea in the short term. However, in longer run demand for non-urea fertiliser is expected to be strong.   Monsoon to remain key monitorable for demand: The India Meteorological Department (IMD) has forecast a normal monsoon for India in FY2013. This will increase the demand for fertilisers in the kharif season. The June-September monsoon season accounts for 85% of the total annual rainfall in the country and is crucial for India's largely rain-fed kharif crops. Apart from a timely arrival of the monsoon, the spread of the rainfall also matters. The spread and distribution of the rainfall will be the key monitorables rather than just the timely arrival of the monsoon. A random and ill-distributed rainfall may hurt the agri production as well as the fertiliser demand. Any delay in the arrival of the monsoon or an inadequate rainfall due to El Nino expected in August 2012 may affect the demand for fertilisers.    Government increases MSP for all major crops: The Cabinet Committee on Economic Affairs has approved the minimum support prices (MSPs) for kharif crops of the 2012-13 season. The MSP of paddy (common) has been fixed at Rs1,250 per quintal and that of paddy (Grade A) at Rs1,280 per quintal. This represents an increase of Rs170 per quintal over the last year's MSPs. The higher MSPs as compared with the last year's MSPs for all major crops will motivate farmers to improve their yield which will ultimately drive the demand for fertilisers.    Outlook: A 20 to 30% increase in the MSPs will motivate farmers for better yield which will support the consumption of the fertilisers in FY2013. In addition, the forecast of a normal monsoon also augurs well for the demand. Hence, we believe that the volume growth of the fertiliser companies in FY2013 will be better as compared with that in FY2012 (a 6% growth in FY2012). Further, on the valuation front companies like Coromandel Fertilisers, Chambal Fertilisers and GSFC are trading at a discount to their mean valuation which leaves room for an upside. At the current market price Chambal Fertilisers, Coromandel Fertilisers and GSFC are trading at 8.4x, 8.63x and 4.7x to their respective FY2014 consensus earnings estimates. However, the depreciation in the rupee and a sub-normal monsoon could be the key concerns for the sector.   Click here to read report: Investor's Eye Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Pulse - RBI's mid quarter policy review; Update - Pharmaceuticals

 

 

Investor's Eye [June 18, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK RBI's mid quarter policy review  Amid the expectation of a 25-basis-point reduction in the repo/cash reserve ratio (CRR) rates the Reserve Bank of India (RBI) surprised the market by keeping the key rates unchanged in its mid quarter policy review. According to the central bank, it has already frontloaded the rates cuts (a 50-basis-point rate cut in April this year) while the inflation scenario continues to be challenging. With regard to growth the RBI asserts that several other factors are responsible for the slowdown in the investment cycle as banks' effective lending rates remain lower than the levels seen during the 2003-08 period. Going ahead, the government's fiscal action especially with regard to the fuel price hike and macro data will decide the course of the monetary action. SECTOR UPDATE Pharmaceuticals      Mid-sized players prepare to take center-stage in the USA We have studied and analysed the pattern of the latest abbreviated new drug applications (ANDAs) approved by the US Food and Drug Administration (USFDA). On the basis of the number of ANDAs approved for the key Indian players, we feel that the mid-sized players have outpaced the major players in the past few months. Though the number of approvals does not exactly represent the revenue potential of the individual players, but the pace of the approvals surely shows relative activity and preparation of the players for the US market.    Key trends    Major global players outpace Indians during first half of June 2012  The starting weeks of June 2012 witnessed a dry period for the Indian players, as most of them could not open an account in terms of obtaining ANDA approvals. Except for Dr. Reddy's Laboratories Ltd (DRL), which received an ANDA approval for the generic Requip (ropinirole hydrochloride), none of the Indian players received any ANDA approval during this period. In contrast, major global players like Teva Pharmaceutical Industries, Watson Pharmaceuticals, Sandoz and Mylan Inc together received six ANDA approvals out of the 11 approvals sanctioned by the USFDA up to June 14, 2012.    Mid-sized players perform better  In the past few months a sizeable number of ANDA approvals were received by the mid-sized players like Aurobindo Pharmaceuticals, Strides Arcolab, Glenmark Pharma and Torrent Pharmaceuticals. Companies like Ranbaxy Laboratories, whose approvals were stalled due to the ban on two of its manufacturing facilities in India, also received approvals (from the newly approved Mohali plants) in April and June this year. However, the pace of approvals fell for Lupin and Sun Pharmaceuticals during April-June 2012 (up to June 14th), though on a cumulative basis these players hold a strong pipeline of ANDA approvals.   A few blockbuster products go off patent during April-June 2012; but stiff competition limits the scope The first two and a half months of Q1FY2013 have seen a few blockbusters getting off patent. However, most of them are witnessing intense generic competition leading to severe erosion in product prices. We do not expect much upside from these products for the Indian pharmaceutical players.    Outlook  The trend of approving ANDAs in the USA during the past few months was mixed. The big players like DRL and Lupin showed a fewer number of approvals relative to their historical trends whereas players like Strides Arcolab, Glenmark Pharma and Ranbaxy Labs seemed prepared to grab the center-stage in the US generic markets. Nonetheless, we believe players like Sun Pharma and Lupin would continue to be strong players in the USA owing to its large product basket and ability to play in niche segments.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Pulse - Industrial output remains flat in April 2012; Update - Wipro (Upgraded to Buy from Hold), Maruti Suzuki India (Merger of Suzuki Powertrain with MSIL)

 

 

Investor's Eye [June 12, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK Industrial output remains flat in April 2012 The Index of Industrial Production (IIP) remained flat in April 2012, registering a growth of 0.1%, which was significantly below the market's expectation of a 1.7% growth. The sluggish growth in the manufacturing sector and the decline in the mining sector continue to stress the IIP's growth. The March 2012 IIP numbers have been revised marginally upwards to -3.2% from -3.5%. For FY2012, the IIP growth has been revised upwards marginally to 2.9% as against 8.2% in FY2011. Outlook The IIP numbers have been quite volatile recently and remained flat in April 2012. Based on the 3-monthly moving average, the IIP growth is 0.3% whereas for FY2012 the growth has been revised to 2.9%. Both the indicators point to a slowdown in the industrial activity along with the weak GDP growth for Q4FY2012 at 5.3%. In view of the recent decline in the crude oil prices and the dismal GDP and IIP numbers, the market expects the RBI to reduce the CRR by 25-50 basis points in the coming mid quarter policy review.   STOCK UPDATE Wipro Cluster: Apple Green Recommendation: Buy Price target: Rs450 Current market price: Rs393 Upgraded to Buy from Hold  We recently attended the annual analyst meet of Wipro. The company's chairman Azim Premji, and CEO - IT services, T.K. Kurien addressed the meet along with various other senior members of the management team. The management indicated that the re-alignment of organisational structure is complete with enhanced focus on creating differentiation at the front-end (client interaction/sales team) and standardisation of the back-end (developers/project delivery team). Though there are cases of delay in decision making and signs of lower client spent among banking, financial services and insurance (BFSI) clients (contribute 26% of total revenues), the demand environment in some of the other industry verticals is much more optimistic. On the valuation front, the stock has corrected since our last update and we have still not factored in the potential upgrade in earnings due to depreciation in the rupee. Consequently, we are upgrading our recommendation to Buy from Hold. However, we continue to maintain Tata Consultancy Services (TCS) as our preferred pick among the large-cap front line stocks.    Valuation Wipro's management remains committed to achieve aspiration goals from its organisational alignments in the coming years. However an uncertain macro environment has pushed ahead the timeline for the same. Nevertheless, we derive comfort from Wipro's strategy to strengthen its front-end with its clients-centric approach and the same would augur well for business visibility. At the current market price of Rs393, the stock trades at 15x FY2013 and 13.5x FY2014 estimated earnings. The stock has corrected since our last update and we have still not factored in the potential upgrade in earnings due to depreciation in the rupee. Consequently, we are upgrading our recommendation to Buy from Hold. However, we continue to maintain TCS as our preferred pick among the large-cap front line stocks.      Maruti Suzuki India Cluster: Apple Green Recommendation: Hold Price target: Rs1,430 Current market price: Rs1,146 Merger of Suzuki Powertrain with MSIL  Maruti Suzuki announces the merger of Suzuki Powertrain India  Suzuki Powertrain India Ltd (SPIL) was a 30:70 joint venture (JV) between Maruti Suzuki (Maruti) and Suzuki Motor Corp, Japan. The JV was commissioned to manufacture diesel engines for Maruti's requirement in the domestic market. SPIL's current diesel engine capacity has been expanded from 2.5 lakh units to 3 lakh units annually.  During FY2012, SPIL reported net sales of Rs4,551 crore, growing 13% year on year (YoY). The company reported an operating margin of 12.1% in FY2012 against 15.9% in FY2011. The profit after tax (PAT) declined by 4.6% to Rs115 crore in FY2012.    Management indicated of multiple operational benefits post merger Maruti's core strategy now revolves around gaining better control on the diesel business. A single management control, higher localisation, raw material synergies and right capital allocation are the top agendas behind the merger.  In the short term, Maruti's management seeks to lower import content from 30% currently and increase localisation. Capital productivity would be increased by avoiding group transactions. Joint procurement of materials and adjusting to demand dynamics are the other focus areas aimed at bringing down costs.    Valuation offered for Suzuki powertrain looks reasonable Maruti would issue 1.317 crore shares to acquire the 70% stake in SPIL from its parent company. Based on the closing price of June 12, 2012, the valuation is estimated at Rs2,436 crore. This compares with Rs1,317 crore being invested in SPIL by both the partners since 2006.  Considering Rs1,700 crore of brownfield investment in the Gurgaon engine plant for equal capacity with tooling already available, the current valuation given for SPIL by Maruti looks reasonable considering Rs500 crore of cash profit it generates every year.    We estimate a 1.2% impact on Maruti's EPS We expect a 4.6% equity dilution based on the fresh shares issued by Maruti. However, consolidating 100% of SPIL's profit with the main company and computing earnings with the expanded equity base, we estimate an earnings per share (EPS) impact of 1.2% without taking into account any synergy benefits.  We are keeping our FY2013 estimates unchanged as the full effect of the merger would be felt only from Q4FY2013. For FY2014, we expect the marginal EPS impact to get offset by cost savings post the merger. We believe that the stock price would be influenced more by the Reserve Bank of India's policy on rate cuts, government's fuel pricing and the demand scenario for petrol cars. We keep our recommendation as Hold.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Thematic Report (Impact analysis of sharp fall in rupee on Sharekhan universe); Update - Tata Consultancy Services, Fertilisers

 

 

Investor's Eye [June 11, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Impact analysis of sharp fall in rupee on Sharekhan universe  Currency impact on Sharekhan coverage universe We applied four conditions on our coverage universe to ascertain the impact of the rupee's depreciation on various companies. Our findings reflect that Maruti Suzuki (Maruti) and Hero MotoCorp (Hero) have been affected the most due to expensive raw material imports and royalty pay-outs. Gayetri Projects and Sintex Industries (Sintex) would be affected the most on account of their foreign currency loan exposures. The companies that will benefit the most are Infosys, Tata Consultancy Services (TCS), Provogue, Bharat Forge, Divi's Laboratories (Divi's Labs) and Cadilla Healthcare (Cadilla). We have assumed a rupee/dollar rate of 55.5 and a rupee/yen rate of 1.40. STOCK UPDATE Tata Consultancy Services Cluster: Evergreen Recommendation: Buy Price target: Rs1,364 Current market price: Rs1,231 Upbeat on demand momentum, macro deterioration major worries  We recently interacted with the management of Tata Consultancy Services (TCS) to get an insight into the software giant's Q1FY2013 performance and its outlook for FY2013. The TCS management indicated status quo on the operating/business environment with no major deceleration or acceleration seen in the demand momentum in the last three months. However, decision making is still lagging behind the anticipated line, with clients concerned over the macro uncertainties relating to the euro zone crisis. Nevertheless, the management remains upbeat about the overall demand momentum and expects to grow at a rate better than the industry average growth and likely to surpass the Nasscom growth corridor of 11-14% for FY2013 on a constant-currency basis.    Valuation: The TCS management remains upbeat on the demand environment, notwithstanding the worries on macro deterioration. We believe that on a constant-currency basis TCS will grow at a rate faster than the industry average, possibly surpassing the Nasscom growth corridor of 11-14% for FY2013.  At the current market price of Rs1,231 the stock trades at 18x FY2013E and 16x FY2014E earnings. Our estimates are based on a rupee/dollar rate of 50 for FY2013 and 48.5 for FY2014. We have not incorporated the recent depreciation in the rupee in our estimates; though this will provide further upside to our estimates for FY2013 and FY2014. But the same is unlikely to lead to any major multiple  re-rating of the stock, given the macro uncertainties. TCS remains our top pick in the information technology sector, given the strong predictability of its business and its robust execution engines. We maintain our Buy recommendation on TCS with a price target of Rs1,364.      SECTOR UPDATE Fertilisers      Firm prices dent demand for non-urea fertilisers Key points Domestic producers suffer; imports spurt in May 2012: In May 2012, the aggregate sales of the domestically produced fertilisers (by 15 leading manufacturers) declined by 8% as compared with the sales in the same period of the previous year. In May 2012 the import of fertilisers (di-ammonium phosphate [DAP], Muriate of Potash [MOP] and complex fertilisers) increased from 3.8 lakh tonne to 4.7 lakh tonne despite a decline in the import of urea and MOP. The import of complex fertilisers along with DAP increased during the month mainly on the back of higher imports from Indian Potash, a trading arm of the Government of India. The DAP and complex fertiliser imports grew by 149% and 2303% respectively in May 2012. The import of urea and MOP decreased by 96% and 30% during the same month.  Similar trend on YTD basis: Even on a YTD basis (April-May), the domestic fertiliser companies witnessed a decline of 10% in the sales volumes whereas the imports of DAP and the other complex fertilisers spiked up. The indigenous sales of the DAP and complex fertilisers was lower due to the lower availability of phosphoric acid and other key raw materials as the negotiations with the global supplier have not concluded yet. The sales of DAP and complex fertilisers was lower by 26% and 52% respectively whereas the sales of urea improved by 9% during May 2012.  Outlook: The consumption of fertilisers in the coming month will improve as the kharif season starts with the arrival of the monsoon in Kerala and the other west coasts of India. But we believe that further firming up of the prices of the non-urea fertilisers particularly DAP and MOP would negatively affect the demand. The depreciating rupee against the dollar will increase the cost of import of the non-urea fertilisers in spite of a decrease in the prices of the raw materials in the international market. This has become a huge risk for the fertiliser companies in terms of margin pressure. So going ahead, the margin of the complex fertiliser manufacturers will remain under pressure and the demand for complex fertilisers will also remain sluggish due to the high prices. We prefer pure urea manufacturers like Chambal Fertilisers along with SSP manufacturers like Rama Phosphate and Liberty Phosphate. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.